Dropbox Files for I.P.O., and Other ‘Unicorns’ Are Watching

Drew Houston, chief executive of Dropbox, which was most recently valued at about $10 billion by private-market investors.Credit
David Paul Morris/Bloomberg

In Silicon Valley and on Wall Street, it has long been a guessing game about which of the most richly valued technology start-ups would be next to test the public markets.

On Friday, there was an answer: Dropbox, an online file storage company privately valued at about $10 billion, filed paperwork to raise up to $500 million in an initial public offering.

While Dropbox may not have the glamour of a ride-hailing app like Uber or a streaming music service like Spotify — both of which are likely initial public offering prospects — the company is in the same broad group known as “unicorns,” which are start-ups valued at more than $1 billion by the private investors that have so far funded their growth. How Dropbox fares as it goes public could help determine whether other unicorns follow suit.

Dropbox will be especially scrutinized after the fizzling of other buzzy tech start-ups that went public last year. Shares of Snap, the unicorn behind the popular Snapchat app, surged when it went public last March, but it has since struggled to stay above its offering price of $17 a share. And the meal-delivery start-up Blue Apron, which went public at $10 a share last June, is now trading at just above $3 a share.

Still, the public offering market has gotten off to a fast start this year, with some 34 companies raising $11.87 billion in the public markets to date, according to Dealogic, a data provider. This comes despite a bout of stock market volatility this month that briefly sent the Standard & Poor’s 500-stock index down more than 10 percent from its high in late January.

In total, the number of private companies worth more than $1 billion stands at 228, up from 197 last May, according to CB Insights, a firm that tracks venture capital funding and start-ups.

“We’ve been hoping that 2018 and 2019 would be the big year for tech and the unicorn class,” said Matt Kennedy, an analyst at Renaissance Capital, a firm that provides data on the public offering market. “Dropbox is definitely going to be a milestone.”

Goldman Sachs, JPMorgan Chase and Deutsche Bank are among the banks underwriting Dropbox’s offering. A spokeswoman for Dropbox declined to comment.

Drew Houston and Arash Ferdowsi founded Dropbox in 2007 after meeting as students at the Massachusetts Institute of Technology. They initially named the company Evenflow after a song by the rock band Pearl Jam. Their goal was to make it easier for people to gain access to all their digital information, including documents and photos, on any device, and to automatically keep all those files updated as they were modified.

Since then, Dropbox, which is based in San Francisco, has grown into one of the leading file-syncing services, though it faces stiff competition from Google, Microsoft and others. In its filing, Dropbox said it had more than 500 million registered users, more than 11 million of whom paid for the service.

In its filing with the Securities and Exchange Commission on Friday, Dropbox said it intended to use the money it raises in the offering for a variety of purposes, including potential acquisitions. Dropbox still loses money, but those deficits are narrowing, and its revenue has been rising at a double-digit rate.

Last year, the company lost $112 million, compared with $210 million the previous year. Its revenue rose to $1.11 billion last year from $845 million the year before.

Whether Dropbox can support a high valuation in the stock market is unclear. Its closest point of comparison, a Silicon Valley storage company called Box, has a market capitalization of about $3.2 billion on annual revenue of about $400 million.

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Dropbox said in its filing that it expected its expenses to rise, and it said its revenue growth rate had slowed.

Still, when it goes public, Dropbox will be an important moment, including for early investors — such as venture capitalists — who have pumped billions of dollars into an array of tech ventures and expect a return when the companies reach the stock market.

Sequoia Capital, a prominent Silicon Valley venture capital firm, is the largest institutional shareholder in Dropbox, with about 23 percent of its shares, and another investment firm, Accel, holds just over 5 percent, according to the company’s filing.

The biggest owners of Dropbox stock are its founders. Mr. Houston, 34, holds about 25 percent of the company’s shares, and Mr. Ferdowsi, 32, holds just under 10 percent.

Mr. Houston, who is now Dropbox’s chief executive, grew up in Acton, Mass., and began programming at a young age and showing early signs of interest in entrepreneurship. As a middle schooler, he beta-tested computer games looking for security flaws. As a teenager, he worked for a robotics start-up converting its code to Linux.

At M.I.T., Mr. Houston, who belonged to the Phi Delta Theta fraternity, would head to the roof of the fraternity’s building and sit on a folding nylon chair reading business and marketing books.

“I wasn’t planning to get my M.B.A. on the roof of Phi Delta Theta, but that’s what happened,” he said, speaking to M.I.T.’s graduating class in 2013.

Mr. Houston took a year off after his sophomore year and started an SAT prep company called Accolade with his former high school teacher Andrew Crick. The start-up did not work out, and Mr. Houston went back to school. After graduating, he repeatedly forgot to carry his USB memory sticks and said that inspired him to try to store files in the cloud.

So he tapped Mr. Ferdowsi, still a student at M.I.T., to be his co-founder. The team received funding from Y Combinator, a Silicon Valley start-up incubator, becoming one of the firm’s most successful investments.

On Friday, in a founders’ letter that accompanied their filing, Mr. Houston and Mr. Ferdowsi wrote about how they started Dropbox with the idea “that life would be better if our most important information lived in the cloud.”

As their business has grown and more people have adopted their technology, Dropbox’s mission has now become “about keeping people in sync — connecting people and their most important information,” the duo wrote.

A version of this article appears in print on February 24, 2018, on Page B1 of the New York edition with the headline: ‘Unicorns’ Watching As Dropbox Seeks I.P.O. Order Reprints|Today's Paper|Subscribe